Can we leave our unused trust dormant?
The functioning of the various Masters of the High Court being what they are (and the comparative speed and ease of use of CIPC being markedly better) we are quite often asked by clients who have decided to no longer use a trust as their main operating entity,
- whether they could and should just leave a trust which is not currently in use “dormant”, or
- whether they should take the active step of notifying the Master that it is being terminated and close officially it down.
Technically and in terms of the law as strictly applied, a trust does terminate as soon as it has no assets. However, the office of the Master does not seem to actively investigate or police this, and relies rather on trusts reporting to the Master that there are no assets, before they will take steps to close a trust down. We think that this is because the actual use of trusts (for all sorts of purposes) means that there must often be trusts which are intermittently without assets or being resuscitated after a spell of inactivity and lack of funds.
Therefore, most trusts which are no longer in use are merely left to lie ‘dormant’ and - the offices of the Master must be littered with dormant trusts, we think!
However, before deciding just to leave the trust to lie dormant, the existing trustees should be aware that there are some risks to leaving a trust dormant and also some ongoing administration
requirements to be aware of like:
- Even dormant trusts need to file a tax return each year. And this would require keeping the letters of authority of the trust and the e-filing details current. And paying someone to do that.
- If a trust is being left dormant in case it is to be used in future, then the letters of authority should be maintained and updated as (from our deep personal experience) it is when these matters are left for too long (and those whose names appear on the letters of authority are long out of touch or even deceased) that it can become really difficult to get the trust back into working order. If a trust has been paused for too long, it is simpler, quicker and cheaper to set up a new legal entity, in which case one should really have closed the trust down long ago, and saved on the maintenance admin and costs; and
- While there are ‘live’ letters of authority and, perhaps, resolutions signed by trustees delegating authority to any one of them or to someone else, there is the risk that the someone may incur obligations or debt on behalf of the (dormant) trust, without the knowledge of the (other) trustees.
Before leaving a trust to lie dormant trustees need to consider whether they will be able to take care of the minimal maintenance required and to weigh up the risks of leaving their names on the letters of authority of the unused trust.